Novice Investing - Microsoft Should Not Yahoo Now

Date: Tuesday 13th 2008f May 2008 07:14:31 AM

Microsoft Should Not Yahoo Now - 02/01/2008

By: Hari Wibowo

There is a surprise announcement coming from Microsoft Corp. (MSFT) this week. Microsoft has offered to buy Yahoo! Inc. (YHOO), its past archival, for $ 42 Billion or $ 31 per share which represents 62% premium to Yahoo's latest share price. During the announcement, Microsoft cited a potential $ 1 Billion cost saving for the merger. As of late, Microsoft had made some bold acquisitions such as the $ 6.6 Billion takeover of aQuantive and a $ 270 Million, 1.6% stake of facebook essentially valuing it at $ 15 Billion. All of this is a reckless acquisition in our opinion.

Looking at this $ 42 Billion, this signals yet another Microsoft's desperation. First, why on earth are you paying such a huge premium for such an established company? I realize that Yahoo shares has been plunging lately but it is not without reason. Yahoo has been lagging Google in terms of search technology and other initiatives. If it is a highly growing company with revenue set to explode, then it makes sense. In the web business, Yahoo can be considered as a mature company with growth roughly in line with the industry average.

Second, with Yahoo just recently announcing less than stellar earning, employees may see the move as Microsoft's effort to take advantage of Yahoo's weakening position. While it is common practice in business, I feel that Microsoft should wait at least a few weeks to announce the deals to conceal its desperateness.

Third, with $ 42 Billion, Microsoft can buy out other firms that have advanced technology for the next phase of web generation. With Yahoo!, Microsoft is essentially buying its wide audience and proven brand name. However, it lacks the technology content as can be evidenced by its recent slump.

Fourth, desperate to make the deal, Yahoo! may not want to accept Microsoft's price and it may start a bidding war. This shows that Microsoft was not even sure that Yahoo! would be willing to merge with them. In the

past and in the future, you might expect cultural clash between the two companies. Therefore, this merger may not achieve its $ 1 Billion cost saving outlined by Microsoft during the merger announcement.

Many things can go wrong with this merger. The way we see it, there may be more obstacles than what we see on the surface. However, in the event that the merger goes through, Microsoft needs to move fast to integrate its acquisition. Its largest competitor, Google, will utilize any business opportunity that arises as a result of distraction from this merger announcement.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Yahoo Inc. (YHOO) or any other securities.

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